Now that moving to the Cloud has become mainstream, it’s time for organizations to confront their biggest enterprise application challenge in the era of digital disruption – revamping their enterprise resource management (ERP) systems to keep up with the times.

It wasn’t too long ago that many industry pundits suggested that the advent of the Software-as-a-Service (SaaS) model was okay for front office applications, such as customer relationship management (CRM) and collaboration, but would never make inroads in the more complex and complicated world of back office systems, such as financial management and ERP.

Those days are gone.

Organizations of all sizes across every industry are facing escalating customer expectations, intensifying competitive pressures and a widening array of operational demands due to new technological innovations such as the Internet of Things (IoT), artificial intelligence (AI) and machine learning (ML).

The cumbersome ERP systems of the past were not designed to respond to these challenges. Instead, they were often put into place during a period of relatively straightforward external requirements to systematize a relatively static set of internal business processes. As a result, many organizations have been forced to cater their corporate strategies to fit within the constraints of their ERP systems rather than pursue new business opportunities that can be supported by their internal operations.

The growing gap between the functional capabilities of traditional ERP systems and the operational needs of many organizations has resulted in a slowdown in this software segment. Allied Market Research believes the global ERP market will only experience a 7.2% compound annual growth rate (CAGR) through 2020, with the vast majority of the growth being driven by a new set of cloud-based ERP solutions.

There have been a number of Cloud-based, SaaS-oriented companies that have been working hard to fill this void in the ERP market for the past ten years. While Workday has received the bulk of the attention, there are others that have also made inroads into large and mid-size organizations worldwide. There are a number of factors which have contributed to the accelerating adoption of Cloud-based ERP solutions.

The success of Salesforce.com in the CRM, sales and marketing automation and service management arenas, along with ServiceNow in the latter category, has set an example and a new standard for how enterprise applications should look and perform in the eyes of a growing number of corporate executives and end-users. Now, they want similar systems to support their escalating back office needs.

The concept of ERP has also been shifting from the idea of a monolithic system supplied by a single vendor that demands an army of experts to deploy over multiple years, to a more modular set of services that can be implemented more quickly to address specific business requirements.

An important ingredient in the new, more incremental approach to Cloud ERP solutions is their heavy reliance on application program interfaces (APIs) which make the data integration process easier. The ease of integration is also enhanced by a more tightly-knit ecosystem of ISVs that have either been borne on or have associated themselves with a common platform or architecture, like that offered by Salesforce.com. This common foundation enables organizations to more quickly adopt specific ERP-oriented applications, such as cost accounting, supply chain, material resourcing planning (MRP) and others incrementally.

The growing momentum in the Cloud ERP market has led to some consolidation of the various players. Sage acquired Intacct last July to incorporate Cloud-based financial management into its software portfolio. At the time, Intacct was reporting three-year revenue CAGR in excess of 33% while Sage was forecasting just 6% growth in its traditional business. More recently, Rootstock acquired Kenandy to bring together two Cloud ERP vendors that have built their solutions on the Salesforce.com platform.

A clear indication of the shifting tides in the ERP market is the growing number of organizations that are replacing their installed systems with a new Cloud-based solution. Earlier this month, Rootstock announced that Mipox, a global producer of polishing films for the high-tech industry based in Japan, has selected the Rootstock Cloud ERP applications to support more than 400 users at 22 sites in 12 countries and replace a SAP system.

You can expect to see many more customer wins for Cloud ERP companies in the coming year as more organizations put aside their reluctance to confront their back office woes and decide to transform their traditional business operations to keep pace with their rapidly changing corporate requirements.

Jeff Kaplan is Managing Director of THINKstrategies, an independent consulting firm focused on the business implications of the on-demand services movement. He is also the founder of the Cloud Computing Showplace, and the host of the Cloud Innovators Summit series. He can be reached at jkaplan@thinkstrategies.com.

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